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Wednesday, October 31, 2012

The Trader's Mind II - The Rush

When a trader first begins trading, regardless of whether he is successful, he experiences a rush. A trader who has beginner's luck is likely to experience exhilaration of suddenly coming into money that he never imagined. This leads him to think trading is easy and make a conscious or unconscious commitment to trading as a profession.

The rush of trading is similar to the rush of gambling and other addictive behavior. This will lead him to make significant investments when he doesn't really comprehend the kind of risk for each of these investments. Even a cautious investor will risk more and move to riskier investments until failure hits.

This sort of behavior is automatic and part of human nature and most people find this understandable.

What may be unexpected is that intense emotional experiences can cause sustained changes in the person's behavior. The trader will crave the excitement and rush and continue to engage in trading just to feel the rush of trading. This will automatically put a trader on the track to some very bad habits.

For example, most new traders overtrade. A consistent winning trader may take four to ten trades a day while a new trader is likely to take 40. This is because the initial rush is driving the trading behavior. A second common habit is trading out of boredom. The trader's need for excitement and knowledge of what is possible drives him to seek that experience over and over again.

As a result, the trader does not even realize he has overtraded. He may have thought that he has taken 10 trades and be shocked to find that he has taken 40 trades. Once a trader introduces himself to the trading world in such a fashion, he already doomed to overtrade and go on tilt. Many traders blow their accounts in a few days and are shocked when it happens.

If you are in this stage, stop and ask yourself if you really want to trade to escape the drudgery of your life. Getting a motorcycle is far cheaper. Trading has to be a deliberate, carefully considered business decision. You need to think like the casino, not like the gambler.